Despite seeing increased parking demand and raising parking rates, the Ann Arbor Downtown Development Authority is on the verge of running a deficit in its parking fund — a circumstance that would violate state law, according to an auditor.

However, DDA officials downplayed the significance, even as overall cash reserves fell this past year from $10.9 million to $8.7 million.

Alan Panter, a certified public accountant from Abraham & Gaffney P.C., offered an overview of the DDA's latest audit during a committee meeting on Wednesday.

"The parking fund is close to a zero fund balance," Panter said.

The audit shows the DDA's parking fund had a balance of $104,821 at the end of the last fiscal year on June 30. The overall parking budget is about $16 million, meaning cash reserves equal less than 1 percent of budget.

But overall, the auditor said, the DDA still is in good shape financially. When the parking fund is combined with other DDA funds, Panter said, the authority actually has a relatively healthy fund balance, and that's the way the DDA is choosing to look at its finances.

"Overall, it was an excellent audit," said DDA Chairman Bob Guenzel. "As the auditor said, it was a clean audit, which is what an organization wants."

Guenzel said the DDA has been planning to draw down its fund balances to pay for the $50 million underground parking structure under construction on Fifth Avenue downtown. The DDA also has been raising parking rates to help finance the project.

DDA officials remain confident the parking fund balance will build back up to a healthier level in the coming years, and they say they're watching it closely.

"The organization has been planning this construction, and so we know we were low on fund balance for parking," Guenzel said. "But we have a substantial total fund balance that is well over 20 percent (of budget), so I think that's significant."

The DDA took in $18.7 million in revenue in 2010-11, while spending $21.4 million, the audit shows. That dropped the DDA's overall fund balance by $2.7 million.

• Download a copy of the audit

The audit notes one violation of state law, which is that the DDA incurred expenses in its parking fund in excess of the amount appropriated. Only $15.7 million was appropriated in the parking fund budget, but the DDA spent $337,478 more than that.

"We recommend the authority monitor expenditures against adopted budget in all applicable funds and make appropriate budget amendments as needed," the audit states, citing a violation of sections 18 and 19 of Michigan Public Act 621 of 1978.

DDA officials downplayed the violation, calling it a timing issue.

"There was a late bill that was paid and so that's, in my mind, a very technical issue," Guenzel said. "I'm really pleased with the audit and proud of what the organization has done."

About $3.42 million of the DDA's revenue came from property taxes, which was down about 3.4 percent from the $3.54 million realized the year before.

Investment income was down from $159,606 to $39,804. As of June 30, the DDA had more than $10 million in investments, the audit shows.

Revenue generated by the DDA's 4,500-space off-street parking system and 1,900 parking meters actually went up from $14.6 million to $15.2 million due to increased parking demand and higher parking rates. The audit notes the final budgeted parking revenues still were $818,916 — or 5.12 percent — less than what the DDA originally budgeted.

Adding to the DDA's financial challenges is a new parking agreement under which the DDA is obligated to transfer 17 percent of all parking revenues to the city of Ann Arbor.

On the expense side, the audit shows $4.2 million was spent on capital outlay, including money from both the parking and TIF funds, while $660,650 from the TIF fund went to debt service.

TIF stands for tax-increment financing, which is the incremental tax revenue the DDA captures from new construction and improvements to properties in the downtown district.

The audit refers to the DDA's TIF fund as the "general fund." The audit separates capital project funds into another category labeled "non-major governmental funds," while the parking fund is broken out separately.

The general fund balance dropped from $7.36 million to $6.12 million during the last fiscal year, while the parking fund balance dropped from $879,893 to $104,821, the audit shows.

Meanwhile, the fund balance for non-major governmental funds dropped from $2.66 million to $1.96 million, the audit shows.

"We have been managing our funds where we use TIF and parking to support the construction of the garage, and it sounds like he has less tolerance for where things stand," DDA Executive Director Susan Pollay said of the auditor's report.

"We had planned for it," Pollay said. "We can certainly make adjustments if that's what he's suggesting."

Pollay said the DDA was created to use TIF funds to build parking garages.

"A lot of the parking garage constructions have been paid for out of the parking system. We can easily use our TIF to pay for the parking garages — the construction, the debt service," she said. "We don't, in any way, use TIF for operating the garages. But in terms of the debt service, very much so."

Overall, Pollay said, she was pleased with the audit.

"He gave us an unqualified, clean audit," she said. "Anybody would be happy to have that and I think that's terrific."

Ryan J. Stanton covers government and politics for AnnArbor.com. Reach him at ryanstanton@annarbor.com or 734-623-2529. You also can follow him on Twitter or subscribe to AnnArbor.com's e-mail newsletters.